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Introduction

Economic inequality – disparities in income and wealth – has been rising up the political agenda for the last number of years. Driven by popular academic works such as that of Piketty, insecurities arising from the financial crisis and the manner in which governments around the world have subsequently sought to balance the books, there are now regularly voiced concerns about inequality.

Changes in economic inequality in advanced economies

Income inequality has increased in a majority of OECD countries compared with the 1980s. However, it has not increased in all, suggesting that there is no inevitability to rising inequality. These large increases in income inequality occurred between the 1980s and 1990s, and increases since have been more subdued. One important development has been the growth in the income share of the top 1% and above of the income distribution. In the UK, the top 1% share of income has increased from 5% in the 1970s to 13%. Wealth inequality across advanced economies tends to be higher than income inequality, and has also been generally increasing over the last few decades. The data available for wealth inequality is much poorer, however.

What determines changing economic inequality?

Multiple explanations have been offered for the rise in income inequality since the 1980s:

Broad economic changes that affect the structure of relative earnings such as globalisation and technological change.

Changes in the shape of the labour market such as the growth in part-time or temporary work and self-employment.

Demographic change, such as ageing populations and the rise of single adult households.

The changing level and nature of income redistribution by governments.

Technological change has fallen out of fashion somewhat as a theory of explaining economic inequality. Many of the other changes, such as the composition of the labour market, labour market regulation, and globalisation, are not easily distinguished in practice. Wealth inequality has attracted less attention until relatively recently. It is influenced by the levels of income inequality, which it itself also influences through, for example, capital income. The pattern of intergenerational transfers such as inheritance and the structure of taxation for these also matter. Piketty has argued that the fundamental driver of wealth inequality is the difference between economic growth rates and the return on capital.

What are the consequences of economic inequality?

The consequences of income inequality on social and economic outcomes are highly contested. Income inequality is correlated with a range of poorer social outcomes in health and education, among others. These striking bivariate correlations however appear to disappear when looking at changes in inequality and changes in outcomes, and there is a more mixed picture in multivariate analysis. The economic consequences of inequality have gained traction after high profile reports from IMF and OECD staff. There is an emerging picture of inequality having consequences for long-term growth.

Income inequality in Northern Ireland

Northern Ireland is the most equal part of the United Kingdom, which is a relatively unequal country when compared to other European countries. The median income (at which half of people are above and half are below) in Northern Ireland is £400 per week before housing costs (BHC), or £361 after housing costs (AHC). Income at the 10th percentile (the income level 10% of people are below) after housing costs is around half this, while income at the 90th percentile is almost double the median. Since 2006-09, the ratio between incomes at the 90th percentile and the 10th percentile has increased slightly.

The bottom 30% of households in Northern Ireland account for 14% of total income. The top 30% account for 51%. The top 10% of Northern Irish households alone receive 24% of all income.

Compared to Great Britain, incomes at the bottom in Northern Ireland are roughly the same. However, going up the income distribution, income at the median in NI is 94% of the GB median, whereas the NI 90th percentile is only 85% of the GB equivalent. Northern Ireland is therefore more equal than Great Britain, and this is largely due to the lower incomes at the top of the distribution. The 90th percentile is 4.2 times higher than the 10th in Northern Ireland, whereas the ratio in Great Britain is 5.1.

Northern Ireland has a lower Gini coefficient than the UK as a whole. The BHC coefficient for NI is 0.3, compared to 0.34 for the UK as a whole. Taxes and transfers reduce the Gini coefficient by 0.21 in Northern Ireland, one of the highest reductions of any region or country in the UK.

The Gini coefficient in the Republic of Ireland was 0.30 in 2012-13, compared to 0.28 in Northern Ireland. The Republic of Ireland has tended to be slightly more unequal than NI on this measure.Northern Ireland is less equal than most Scandinavian and central European countries, and more equal than Poland and southern European countries.

Wealth inequality in Northern Ireland

In terms of savings, there is a relatively high degree of wealth inequality in Northern Ireland, driven by the number of households with none whatsoever. Including property ownership equalises wealth inequality somewhat. A high proportion of households in Northern Ireland have no savings (45%). A minority of households account for the vast majority of household savings and inequality appears to be quite high.

However, the level of savings among households at the top of the distribution is relatively low (the top 10% in Northern Ireland have £20,000 or more in savings, whilst in Great Britain it is £70,000). Whilst the household savings “pie” is very unequally distributed in Northern Ireland, the size of that “pie” it is a relatively small. But inequality in household savings has been growing in Northern Ireland: as the proportion of households with no savings increased, the value of the savings held by those at the top has grown.

Northern Ireland has a higher proportion of households with no savings than Great Britain (45% compared to 33%); but many of them are owner-occupiers so likely to have some equity. The proportion of households with no savings in rented housing in Northern Ireland is close to the level in Britain (22% compared to 20%). Property makes up a much greater share of household wealth in Northern Ireland than financial savings and assets. The total savings wealth held by households in Northern Ireland amounts to £11bn: the total property wealth is four times that at £44bn.

Overlaps between wealth and income

Levels of “high wealth”, measured here as over £20,000 in savings or £150,000 in equity or both, are fairly constant across much of the bottom and middle of the income distribution. 10% of the bottom income decile have high savings or equity or both, compared to 15% of the middle decile. High wealth levels become more prevalent in the top fifth of the distribution. Households in the top income decile are over five times as likely to have high levels of wealth as households in the bottom decile.

Conclusions and policy recommendations

There are two broad reasons to be worried about economic inequality. The first are normative concerns around perceptions of fairness or how deserved disparities in economic outcomes are. The second set of concerns is based around the consequences of economic inequality on social and economic outcomes. This is a highly contested field of work, though the impacts on social mobility, economic growth and aspects of income stand out from the literature review.

Public policy should be concerned with economic inequality, though it is not clear that it should be the top priority. In the case of Northern Ireland, low employment and persistent deprivation might be higher social priorities. Recent proposals to reduce inequality from Piketty, Atkinson and Stiglitz are largely beyond the powers of the Northern Ireland Executive, which should temper expectations about the prospects of a large fall. However, there are still relevant proposals, such as codes of conduct for pay and bolstering institutions which reduce inequality.

This report makes several recommendations for reducing economic inequality in Northern Ireland:

Make provision for Northern Ireland to be included in the Wealth and Assets Survey or create a Northern Ireland version to remedy the lack of reliable wealth statistics.

Distributional analysis should become mainstream in Northern Ireland government decision-making, and should be published where appropriate.

Devise specific targets or objectives around inequality similar to the Scottish government’s Solidarity Target.

Consider how those on low incomes can be compensated for inequality, e.g. through careful design of welfare reform mitigations or reducing high costs.

Examine how Northern Ireland’s low savings rate could be increased, with policy options including government-backed saving account design or automatic deductions in a similar manner to pension contributions. This should be part of a broader agenda of financial inclusion and resilience.

Measures to alter the distribution of market incomes through social clauses; a strategy to manage implementation of the National Living Wage; improving employment rates for disadvantaged groups; and bolstering institutions that reduce inequality.

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NICVA's Centre for Economic Empowerment (CEE) is an economic think tank and skills development programme.